Wednesday, October 30, 2013

Laurent Dubois argues in a very good op-ed in the NYTimes that Caribbean countries should receive reparations for slavery. It also raises the question of the responsibility for the accumulation of foreign debt, and the fact that lender countries might be the ones to blame. For example, Dubois tells us that:

"Haiti won its freedom 1804, but in 1825 it agreed to pay an indemnity to
France in return for diplomatic recognition. The money was used to
compensate French plantation owners.
...
In 2003, Haiti’s president, Jean-Bertrand Aristide, called on France to
repay the 1825 indemnity, which he blamed for his country’s poverty. The
argument was historically sound: to pay France, Haiti had had to borrow
money from French banks, entering a century-long cycle of debt."

Long cycles of indebtedness have in fact reduced the ability of developing countries to grow. They reinforce the limits imposed by the external constraint, that is, the need to export enough to import the intermediary and capital goods needed for productive activities, plus the need to service the foreign debt.

More often than not developing countries (when interest rates in the center rise, or when terms of trade collapse) are forced to grow less to curtail imports and/or default given the inability to service foreign debt. Christian Suter's Debt Cycles in the World Economy provides an interesting analysis of the long debt cycles in peripheral countries based on the World Systems and Long Wave cycle theories. Ginzburg and Simonazzi provide a Sraffian framework here. My paper on long term debt cycles and economic development (written in 2005) is available here.

Tuesday, October 29, 2013

David Warsh from Economic Principals has written a nice post on Marriner Eccles. I particularly think he hits the nail when he argues that:

"Eccles embodied a peculiarly Mormon ethic of public service, full of frontier practicality (as Boston often has represented Puritan ideals and Philadelphia Quakerly ways). His was a role reprised by Willard “Mitt” Romney, who, as governor of Massachusetts, put a mandatory health insurance reform in place, presumably as the model for a national plan. (Romney eventually buckled under Tea Party pressure and disavowed the aim.)"

Although it is not well-known early Mormon doctrine was closer to Socialism that one might think, with an emphasis in redistribution and cooperative work (see for example this paper on "Communism among Mormons"; subscription required).

For more on Eccles go here and here. For a discussion of the LDS social ethic of cooperation the classic book by Leonard Arrington, Building the City of God, is a must read.

Monday, October 28, 2013

Yes, you know the answer to that one. At any rate, there is a nice graph (which I somehow missed before) on spending growth in different administrations (source here).

As one can see, Obama is the one with the lowest rate of growth in public spending. Note also that Clinton is the one with the second and third lowest rates. Dems are the party of small government. Something discussed in this forum a while ago.

Saturday, October 26, 2013

The Economist Free Exchange (FE) blog gets into the debate of where is the elusive natural rate of interest. I've already discussed Krugman's views (see here and here) that the natural rate of interest is negative, and that's why we need fiscal policy, something that he refers to as the Liquidity Trap. FE suggests that William White, formerly from the Bank of International Settlements (BIS) and now from the Organization for Economic Cooperation and Development (OECD), believes that the natural rate is higher than the monetary rate.

According to FE White believes that: "the Wicksellian natural rate must be high and monetary policy too loose because low rates have encouraged all sorts of yield-chasing behavior." If one reads White's paper, we find that he says more precisely the following:

"Moreover, given this particular way of thinking and noting that the financial rate is now constrained by the ZLB [zero lower bound interest rate], this gap can only be redressed by raising the natural rate to encourage investment."

In other words, he believes that central banks, like the Fed, can move the natural rate, by affecting savings behavior presumably associated with inflationary expectations. This would lead to a monetary rate that is lower than the natural rate and increased investment. This is actually the same story that Krugman has favored, which I suggested is an inflationary expectations confidence fairy.

Interestingly enough, still according to FE, DeLong, who seems to be on the same page with Krugman, has responded to White, if FE's description is correct, suggesting that there is little that the Fed can do about the natural rate, and is stuck with a very low monetary rate for a while.

Mind you, the search for the holy grail of the natural rate is futile anyway (yep capital debates; it's been a while). And no act of the Fed will lead to more inflationary expectations and higher spending. And because of the Tea Party, and also fiscal hawks in the Democratic Party, there is no hope for fiscal stimulus. This FE post shows the incredible confusion of the mainstream.

PS: In this post FE also tells us that the natural rate of unemployment is 5.5%. Oh well.

A bail-out is when an outside entity, like external investors, a central bank or an international organization like the IMF, rescues an indebted bank or firm or even a country by injecting money. A bail-in, in contrast is when the creditors are also forced to bear some of the burden of the adjustment. Persaud, a well known financial economist, has recently argued (subscription required) that contingent convertible notes, known as CoCos, convertible notes that can be converted into equity according to specified events, and that "automatically bail-in creditors when banks run into trouble" are no better then fool's gold.

Why should we care? Here is an insider of financial markets, that worked at JP-Morgan in the 1990s, and was a member of the UN Commission of Experts on Reforms of the International Monetary and Financial System (the so-called Stiglitz Commission; Report here), suggesting that these instruments "are a throwback to the failed philosophy at the heart of the 2004 Basel II global banking rules, which made the market pricing of risk the frontline of defense against financial crises." And we know how well that worked.

Not only the recovery in developed countries is anemic, as a result of widespread austerity, but also lax regulation, and excessive risk taking are still the norm.

Wednesday, October 23, 2013

If you read the news it seems that JP-Morgan Chase, the biggest US bank, has agreed to pay US$13 billions on fraud charges for their mortgage practices leading up to the financial crisis. Bill Black, author of the fantastic and properly titled book The Best Way to Rob a Bank Is to Own One, argues that the number is inaccurate.

So more like US$6 billions. Out of profits of more than US$20 last year, and god knows of how much they made out of their fraudulent practices.

I posted Dean's short answer to the question of whether the Affordable Care Act (ACA), aka Obamacare, led to an increase in temporary jobs. The GOP talking point being that firms cannot afford to pay, and prefer to reduce the hours of their workers so as to not be forced to pay health benefits. Below a figure from the Bureau of Labor Statistics (more here, or here).

Part time jobs are declining as a share of total employment, and stand now below the peaks of other recessions like the Eisenhower and Reagan ones. Note that the definition of part time refers to those who worked 1 to 34 hours during the survey reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand.

Lawrence Klein, of Klein-Goldberger US econometric model fame, and author of The Keynesian Revolution (here the Google Books link), and winner of the Sveriges Riksbank Prize in Memory of Alfred Nobel in 1980, has passed away. Klein was a Neoclassical Synthesis Keynesian (often referred to as Old Keynesian now, to distinguish him from the New Keynesians) that made his contribution by developing the empirical applications of the Keynesian model for the US economy.

The seminal work was done in the late 1940s and early 1950s in the context of the Cowles Commission. His book An Econometric Model of the United States, 1929–1952 was further developed in 1955 with his co-author (Arthur Goldberger), published as An Econometric Model of the United States 1929–1952, introduced the celebrated Klein-Goldberger model. The Cowles Commission Model still lives in Ray Fair's macro-econometric model, that maintains essentially the same methodology, resisting to the Lucas critique and the Dynamic Stochastic General Equilibrium (DSGE) models of the Real Business Cycle School (RBC) and their New Keynesian alternatives.

It must be noted that in Klein's original model, expectations did not play a role, since it was complicated to incorporate those, interest rates did not have an impact on investment (basically adopting an accelerator) and that wealth effects (which allow for the Pigou effect, and the return to full employment) on consumption were also absent. So in a sense his model did differ, because of the need to adapt to economic data, from the theoretical versions of the Neoclassical Synthesis, and was closer to heterodox interpretations of Keynes.

The slow recovery continues. According to the last Employment Situation Summary from the Bureau of Labor Statistics (BLS): "Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in construction, wholesale trade, and transportation and warehousing."

The figure above shows that the recovery continues at a very slow pace. And given the political impossibility of additional stimulus, it will likely continue this way. Rational economic policy is not in the agenda any time soon.

Sunday, October 20, 2013

The new issue of ROKE is out. You can get it here. There is a special mini-symposium on Basil Moore's classic book. From the abstract of one of the papers from the symposium:

In 1988 Basil Moore published his book Horizontalists and Verticalists: The Macroeconomics of Credit Money, which this year celebrates its 25th birthday. We discuss this book from today's perspective, and in particular whether Moore's main assertions have been validated or rejected by the development of central bank practice and academic monetary economics. We find that the book has impressively stood the test of time and, despite part of textbook economics still insisting on the money multiplier as an explanation for the money supply, it is not much of an exaggeration to say that we have all become ‘Horizontalists’ in the last 25 years.

Thursday, October 17, 2013

The whole debt-ceiling and government shutdown raised the American angst about its international role in the world economy. Several pundits see the US increasingly as a weak or weaker player in international relations. An antidote for these views about the 'Decline of the American Empire' is provided by Franklin Serrano's paper (h/t Revista Circus & Alejandro Fiorito) "Power Relations and American Macroeconomic Policy, from Bretton Woods to the Floating Dollar Standard", which can be downloaded here. From the intro:

"The purpose of the present work is to try to show the strategic importance of the policy of defending the international position of the U.S. dollar and also of the general orientation of American macroeconomic policies to: 1) the victory of the capitalist side in the Cold War ; 2) the subsequent reestablishment e increase of the bargaining power of the property owning classes relative to the working class in the U.S.A. and finally 3) to the consolidation of the leadership of the American State over the other Nation States, that happened during the 1980s."

Note that Eastern Europe and Central Asia and Asia (China playing a big role) lead the pack. Developed countries basically have stagnant wages and the Middle East is the only region with some real contraction.

Note that these are rates of growth, and that levels are very different in each region. According to the report (p. 10):

"The hourly rate of pay varied from almost US$35 in Denmark, through a little more than US$23 in the United States, to US$13 in Greece, between US$5 and US$6 in Brazil, and less than US$1.50 in the Philippines. Using a different and non-comparable methodology, total hourly compensation costs in manufacturing were estimated at US$1.36 in China for 2008 and at US$1.17 in India for 2007 (United States Department of Labor, Bureau of Labor Statistics, 2011)."

These levels are measured in current exchange rates (not Purchasing Power Parity, PPP), which is in my view good, since it reflects the actual costs that firms do face in international markets.

Wednesday, October 16, 2013

And now for something completely different. Yes, we need a break from the fiscal cliff (do we still use that term?). So how about something that is not depressing (just kidding). Table below comes from Drèze and Sen's recent book on India (see here).

Note that India and South Asia lag considerably with respect to other developing country regions when it comes to child undernourishment and stunting, with 43% and 48% of the children under 5. These provide additional measures of the problems faced by India.

Tuesday, October 15, 2013

There are many stories about doomsday, i.e. the breaching of the debt-ceiling limit of US$16.7 trillion, which would basically force a balanced budget amendment on the Federal government. As I noted, and Dean Baker too (although I disagree that if the dollar was not the key currency it would mean more jobs, but that's for another post), it is unlikely that the default would lead to a dollar crisis. The position of the dollar is relatively safe, if nothing else because Europe and Japan are in crisis, and China's currency is not convertible.

On the other hand, the default will impose severe austerity. Note that deficits have been falling since Obama took office, as can be seen in the figure below, from about US$1.5 trillion, in the first year of the Obama administration (inherited from Bush) to around US$1 trillion last year, and an estimated smaller number this year (without a default).

If a balanced budget was imposed the immediate impact would not be a decrease of spending of US$1 trillion, but that would be what would have to be achieved over a full fiscal year. Even if you assume a small multiplier of say 1.2, that would imply a staggering fall in output of around 8% of GDP. Not a recession, but a huge one. Note that the deficits will actually not decrease, since revenues would collapse, and with it renewed efforts to cut spending.

The fact that something as simple as the multiplier, and as clear in the historical record, and supported by tons of empirical data, could be ignored is incredible. But remember that the people behind this in Congress do NOT believe in evolution, and do think we are living in the end of times. Maybe that's the reason they want to default! Of course all of this could be avoided with a simple vote. Hope springs eternal.

If you read in Spanish I wrote this little note on the last Bank of Sweden Prize in Memory of Alfred Nobel. Also, you may want to read the interview given by Eugene Fama to John Cassidy from the New Yorker in 2010. He says many things, but I would like to point out just a few.

John Cassidy (JC): So what caused the recession if it wasn’t the financial crisis?

Eugene Fama (EF): (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.

...

JC: There were some people out there saying this was an unsustainable bubble…

EF: Right. For example, (Robert) Shiller was saying that since 1996.

JC: Yes, but he also said in 2004 and 2005 that this was a housing bubble.

EF: O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that.

...

JC: Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks?

EF: The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point [emphasis added].

Financial markets do not cause recessions, and we do not know why recessions happen. Also, Friedman was fighting communism (I guess Keynes was a commie), and Obama is a Socialist. This is a 'Nobel' for the Tea Party. No comments.

Lars Syll was right, the Bank of Sweden awarded the Sveriges Riksbank Prize in Memory of Alfred Nobel to Eugene Fama for the Efficient Market Hypothesis (EMH). Lars Peter Hansen and Robert J. Shiller were also recognized for the work on the statistical tests about rational bubbles and for providing evidence that suggests that the EMH might not work, respectively. Even if tempered by Shiller, a New Keynesian that writes with Akerloff, it is still pretty audacious to give Fama and the EMH a 'Nobel' after the last financial crisis. If you had doubts about the state of the profession, and the resilience of the mainstream, this should wipe them out.

Friday, October 11, 2013

That's what the Economic Policy Institute says (see here). The 'missing workers' are fundamentally discouraged workers. I calculated a while ago the unemployment level maintaining the higher participation rate of the late 1990s, and also found significantly larger rate of unemployment (see here).

Or at least is what they suggest in the popular blog Free Exchange. They bring back Peter Garber's research on the Tulipmania, and more recent research by Earl Thompson, which suggests that "the market for tulips was an efficient response to changing financial regulation." They conclude by arguing that:

"It is easy to claim that bubbles are irrational. They seem to represent a deviation of prices from fundamental values—and they contradict basic economic theory. But there has been little attempt to understand how speculation actually works. The example of tulipmania shows the importance of doing that—rather than relying on lazy quips about 'animal spirits' or irrationality."

The notion is related to the idea of the Arrow-Debreu models in which short term prices (they don't have long term prices associated with a uniform rate of profit) do reflect the fundamental values associated to the preferences of agents and the given technology and factor endowments. In this context, the efficient market hypothesis (EMH) suggests that the prices of financial assets reflect all market information, and as a result those prices would not deviate from their fundamentals. In other words, according to the EMH, bubbles do not exist.

Rational bubbles assume that rational behavior may still be associated with deviations of asset prices away from their fundamental values. In general, a self-confirming belief that asset prices depend on a variable that is intrinsically irrelevant, that is, not part of market fundamentals, is assumed. Much discussion goes into the behavioral assumptions that would make rational bubbles possible. Justin Fox's The Myth of the Rational Market, which I reviewed here (subscription required) provides an accessible introduction.

John Eatwell (here; subscription required) noted that a more relevant question than the rationality or not of bubbles is whether they are useful or not. Railroads were built on bubbles, and the dot.com bubble even left some infrastructure in terms of telecommunications that has been useful. Other bubbles, like the one associated with the subprime, are less obviously useful.

Finally, note that the old capital debates are still important to understand the limitations of much of this literature. Garegnani and Petri have noted that even the short run Arrow-Debreu models must bring investment to equality to full employment savings, and as a result some notion of a natural rate of interest is implicitly needed. And then all the problems of the aggregative model apply. So it is not possible to show that long term prices do reflect fundamentals associated with preferences, technology and endowments.

PS: On the related topic of whether the Bubble Act (financial regulation), that followed the South Sea Bubble, led to lower rates of growth see here. For the capital debates go here.

Wednesday, October 9, 2013

APEC leaders gather in Bali this week to discuss the Trans-Pacific Partnership (TPP) agreement, among other topics. In this opinion article that will appear this week in the Bangkok Post, Jakarta Post, China Daily and other Asian papers via the Globalist, GEGI's Gallagher urges reform of the TPP. Based on new GEGI research with Chilean and Malaysian economists, Gallagher argues that the TPP should have safeguards that allow nations to regulate cross-border finance to prevent and regulate financial crises.

Lars Syll had a nice post recently on the forthcoming (next Monday) Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He argues that a likely candidate would be Eugene Fama, for exactly all the wrong reasons, which is apparently what guides most of these prizes in economics anyway. And indeed Fama has perennially been in the short list. Reuters (here) has a different list with three teams of possible winners: Angrist, Card and Krueger for labor economics, Hendry, Pesaran and Phillips for time series econometrics, and Peltzman and Posner for economic regulation (deregulation more likely). And Reuters was correct on the Physics prize, but this year Higgs was a shoe-in.

PS: The 'Nobel' might up for grabs, but Janet Yellen will be the next chairperson of the Fed.

Tuesday, October 8, 2013

New paper by Tom Palley titled "Horizontalists, verticalists, and structuralists: The theory of endogenous money reassessed."

From the abstract:

This paper uses the occasion of the twenty-fifth anniversary of Basil Moore’s book, Horizontalists and Verticalists, to reassess the theory of endogenous money. The paper distinguishes between horizontalists, verticalists, and structuralists. It argues Moore’s ho- rizontalist representation of endogenous money was an over-simp- lification that discarded important enduring insights from monetary theory. The structuralist approach to endogenous money retains the basic insight that the money supply is credit driven but reme- dies horizontalism’s omissions and over-simplifications. Twenty-five years later, horizontalism has largely morphed into structuralism. The theoretical challenge going forward is to develop the role of money and finance in a Keynesian theory of output determination. As regards monetary policy, the challenge is how to conduct policy in a world of endogenous money. These concerns emanate natu- rally from a structuralist perspective on endogenous money.

Monday, October 7, 2013

Economic historian Carlo Cipolla famously noted that human beings fall into four basic categories: the martyr who takes an action and suffers a loss while producing a gain to others; the genius or prodigy who takes an action by which he/she makes a gain while yielding a gain also to society; the crook (and liar too) who takes an action by which he/she makes a gain causing others a loss; and the stupid person who causes losses to others while deriving no personal gain and even possibly incurring losses. At first glance, the shutdown of the government and the looming debt-ceiling crisis seem to indicate that we are dealing with idiots, the likes of Michele Bachmann, Ted Cruz, Louie Gohmert, Steve King, and other Tea Party Republicans.

The Washington Post had a story (h/t Esteban Perez) recently about the ratio of inequality between the 10% richest and the 40% poorest, which they suggest is named the Palma ratio, after Chilean economist Gabriel Palma (see figure below).

The figure suggests that the US is very unequal more so than some African countries and several in Asia, including, for example India. As expected Latin America is very unequal.

Note, however, that if one looks at the World Bank data (figure below), with
the Gini coefficient criticized in the article, one also finds that the US is
more unequal than India and is close to some African countries levels of
inequality.

Yet, as noted by Jamie Galbraith long ago (see here),
using the Theil index instead, and more importantly data on manufacturing wage
inequality, a different picture emerges (see figure below).

In this case,as the authors say: "Higher inequalities are seen in Latin America, Africa, Russia, and South Asia, with the highest in a broad equatorial belt." And, in all fairness, this seems more likely.

Saturday, October 5, 2013

Once one discounts the amounts held by the Federal Reserve and other federal agencies and trusts, like the Social Security Trust Fund, it is around 60% of GDP, as shown in the figure below.

This is not high by historical standards. It is far from clear also that if we used the gross value of 100% of GDP that would be a problem. Further, low rates of interest imply that borrowing is not expensive. In short, there is no rationale for not raising the debt-ceiling. If you had any doubts.

The debt ceiling was enacted in 1917 for one purpose: to fool the rubes back home. Just as Congress started running up debts to pay for the war, they voted in the ceiling to pretend otherwise. And that is why whenever reached, it must be raised.

The debt ceiling is also an anachronism. It is based on the idea that the government must raise money from elsewhere, before it spends. That was true in the days of gold. It hasn't been true, for this country, since at least the creation of the Federal Reserve back in 1913.

In the modern world, when the Treasury writes you a check, your bank credits your account. That's how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Federal Reserve buys back many of them, leaving the public with the cash it would have had in the first place.

Wednesday, October 2, 2013

The figure above shows all employees, not just the federal ones. The spike in 2010 is related to the census. And yes we are below the levels we had at the beginning of the crisis. Shutdown will not help.

Tuesday, October 1, 2013

The U.S. government has begun a partial shutdown of government programs, following a failure across the House and Senate to agree on a stop-gap budget proposal before its midnight deadline.

As Imara Jones at Colorlines points out, "the parts of the government affected by the shutdown disproportionately impact economic opportunity programs for the working poor." Here is a brief overview of the likely unsavory effects as a result of egregious congressional chicanery:

Health needs delayed: The 110 million Americans already in Medicare—the government health program for the elderly—and Medicaid—the federal and state partnership to provide health insurance to the working poor and their children—will continue to receive the services and treatment that they need. However new applications to these programs will be delayed until the government reopens.

Impaired ability to fight disease: The Centers for Disease Control will scale back the monitoring of the spread of infectious diseases and the National Institutes of Health will do the same for critical research into life-saving treatments until the lights come back on.

More people hungry: The Supplemental Nutrition Assistance Program (SNAP), commonly referred to as food stamps, will continue to provide its $33 of weekly assistance to the 48 million Americans who currently receive it. However, the Women Infants and Children Program (WIC)—which covers seven million children and infants, and their mothers—will temporarily end. The program will restart once the government reopens.

Poor kids set back: Funds for the one million children in Head Start will technically expire today, but only a smattering of locations will be forced to immediately close their doors. However, more programs will run out of money and come under pressure the longer this goes on. The same is true for Title I education grants, which provide badly needed assistance to 20 million children in the nation’s poorest school districts. Also, review of new student loan and federal grant applications will be delayed.

Housing at risk: The Federal Housing Administration, which underwrites four out of every 10 mortgages in the United States and is crucial for working families entering the housing market, will not process new home loans during an extended shutdown. Housing vouchers for the working poor and the homeless will also be at risk the longer this goes on.

More immigration delays: Border patrols and enforcement will continue during the shutdown, but new visa and citizenship applications will be stalled until the government is back to work.

So it's happening, even though it seemed unlikely at some point. The government is shutting down, and around 400,000 federal workers will go immediately without pay (see here). Many of the comparisons are with the previous shutting down in November 1995, during the Clinton administration. Yet, back then the economy was in the middle of a boom, predicated on a bubble, but a boom nonetheless. And also, as revenues were increasing, the economy was back then on its way to fiscal surpluses, and lower debt levels. So no debt-ceiling catastrophe loomed in the horizon. Now a debt-ceiling limit may lead to cuts in spending of the order of around US$ 600 billion dollars. So a weal recovery may turn into a recession. Long live austerity!